Procyclicality and path dependence of sovereign credit ratings: The example of Europe

This paper investigates empirically the behavior of Credit Rating Agencies CRAs when assessingsovereign solvency for European countries. Using Probit regressions I find that even after controllingfor macroeconomic factors, CRAs take the business cycle into account. Also, there is a clear case ofpath dependence in sovereign ratings. Additionally, it turns out that there seems to be a discrepancybetween upgrades and downgrades. These results are robust to a number of different specifications.